This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

January 17, 2013

IRS Announces New Deductions for Home Offices

New rule meant to simplify confusing calculation methods

More On Tax Planning

from The Advisor's Professional Library

Taxation of Real Estate
Real estate may be used to shelter income and may offer certain tax benefits. However, the type of real estate investment may result in different tax treatment. Learn how to use these investments to help your clients.

Long Term Care Insurance: Premiums
While premiums for qualified long-term-care insurance may be deductible as medical expenses there are exceptions to this general rule. Learn how to avoid unnecessary tax liabilities.

The lives of home office dwellers just got easier—and maybe cheaper.

The good news is that he Internal Revenue Service announced a new option on Tuesday for those who claim their home as their primary work space. The bad news is that won’t apply to 2012; rather, the allowable expense method will begin for the 2013 tax year.

The deduction method is meant to simplify a confusing process, one that often leaves taxpayers facing an audit. Instead of working through the minutia of the seemingly endless Form 8829, taxpayers will have the option of deducting $5 per square foot for up to 300 square feet of office space, or $1,500.

The word “option” should be emphasized, since home office workers will still have the choice of using Form 8829 if that deduction is larger than the newly introduced alternative method. Individuals will weigh the time expense of filing out the old form against the difference in the size of the deduction.

Currently, taxpayers who claim the home office deduction are required to fill out a separate form calculating the percentage of the home that is used solely for the business and the percentage of expenses that apply to the office. According to CNN Money, it can be very complicated to figure out. But starting next year, the individual will no longer need to do those calculations.

“This is terrific news for the 52% of all small business that work from home, who fight every day to meet their bottom lines while continuing to contribute to the economy,” Kristie Arslan, president and CEO of the National Association for the Self-Employed, an organization that lobbied for the change, said in a statement. “The previous calculation for the deduction was cumbersome and time consuming for America’s smallest business and year after year hard-earned dollars were left on the table.”